4 arrested in alleged government bribery case

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Two employees of the U.S. Army Corps of Engineers and two others were arrested Tuesday in a $20 million bribery and kickback case that prosecutors say helped pay for the purchase of more than a dozen properties, Rolex and Cartier watches, fancy sports cars and hotel accommodations, first-class airline tickets and a trove of other personal luxuries.

Prosecutors say the case may be one of the largest procurement fraud schemes in the nation's history.

An indictment unsealed Tuesday includes charges of bribery, conspiracy and unlawful kickbacks. The two Army Corps employees, Kerry F. Khan, a program manager, and Michael A. Alexander, a program director, received kickbacks in exchange for directing government contracts to a subcontractor specializing in software encryption devices and other information technology, prosecutors say. The men had the authority either to order products and services through government contracts or to secure funding for projects.

Also charged are Khan's son, Lee A. Khan, who prosecutors say controlled a consulting company with his father and also benefited from the scheme, and Harold F. Babb, the director of contracts for Eyak Technology LLC. Eyak Technology is a subsidiary of an Alaska native corporation with Virginia operations. It was the prime contractor for a five-year, $1 billion contract administered by the Army Corps of Engineers.

The scheme, which authorities say spanned roughly four years, involved phony and inflated invoices for government contracts and millions of dollars in kickbacks that were funneled through a network of shell companies in the United States and around the world.

U.S. Attorney Ronald Machen, the top prosecutor in the District of Columbia, said at a news conference that the indictment alleges "one of the most brazen federal procurement scandals in our nation's history."

"This scheme was staggering in scope," he later said. "I think it surprised all of us."

All four defendants appeared in federal court for an arraignment a few hours after their arrest. They wore street clothes but with their feet shackled so they could only take tiny steps into the courtroom. Their attorneys entered pleas of not guilty on their behalf but said they hadn't even had time to closely read the 42-page indictment.

Prosecutors say Khan and Alexander received the kickbacks in exchange for causing the government to award contracts to a Virginia-based subcontractor identified in the indictment only as Company A and as a subcontractor for EyakTek. The company's chief technology officer, who was also not named in the indictment but is described as a co-conspirator, submitted fraudulent and inflated invoices to the Army Corps of Engineers, either directly or through EyakTek, and the work was certified as completed.

The money, approximately $20 million in inflated expenses, was then funneled back to the four defendants, prosecutors said.

In a separate scheme that prosecutors say was halted Tuesday, the defendants allegedly conspired to steer a $780 million contract to Company A, which was going to serve as the prime contractor on an Army Corps contract.

The Khans also agreed to transfer money to a relative imprisoned for a drug trafficking crime to prevent him from snitching on them to law enforcement, according to the indictment.

All four were arrested Tuesday morning as federal agents served search warrants at more than a half-dozen locations in D.C. and Virginia. The investigation is continuing.

"We hold our employees to a high standard and we cooperate with all federal authorities to make sure that we get to the bottom of all these cases and allegations," said Curry Graham, director of public affairs for the Army Corps.

Prosecutors argued they should be held in jail because the 25- to 40-year maximum sentences they face and their connections overseas make them a flight risk. Assistant U.S. Attorney Michael Atkinson also said Kerry and Lee Khan should be kept behind bars because they "threatened serious physical harm against a potential government witness."

The defense lawyers said the government had no reason to keep their clients behind bars, with Alexander attorney Christopher Davis arguing particularly vigorously that his client needed to be set free to care for his cancer-stricken wife as she faces continuing chemotherapy treatments. Alexander appeared especially distraught, alternatively covering his downturned face with his hands and pinching the bridge of his nose while shaking his head.

U.S. Magistrate Judge Deborah Robinson scheduled a hearing for Thursday morning to decide whether the four should be detained pending trial.

A woman who picked up phone at Kerry Khan's Alexandria home hung up on a reporter. Current phone listings for Lee Khan and Harold Babb could not immediately be found. Stephanie Alexander, Alexander's wife, told The Associated Press that her husband is a "good person" who works hard.

"I was in shock" over the arrest, she said.

Rep. Sam Graves, R-Mo., who is chairman of the House Small Business Committee, said bribery and kickbacks in government contracts cannot be tolerated and that his committee had already been working on contracting fraud issues.

"The integrity of the federal procurement system needs to be protected, so that the public has confidence in government contracts and small businesses have every opportunity to compete," he said in a written statement.